SEC’s ‘communications protocol systems’ rule could hit DeFi

Hello and welcome to Protocol Fintech. This Monday: SEC takes a step on DeFi, SWIFT stock and Hester Peirce on code regulation.

out of the chain

The bank operates in Moscow. DAO funded armies. Avocado Inflation. This year is off to a chaotic start. Nervousness over the separation of Russian banks from SWIFT, which Western powers appeared to overcome over the weekend, was roasted on Twitter as a sign of cowardice. But maybe it was just caution. Our modern financial system is delicately put together. Nobody really knows what happens when we start to take it apart, even if the demands of war demand it.

—Owen Thomas (E-mail | Twitter)

The SEC’s Big DeFi Move

Gary Gensler has been talking about taking on the crypto industry since his debut last April. Now he gets to work. The SEC is taking on the crypto industry in a way that could have profound implications, especially for DeFi, by expanding the agency’s regulatory authority over decentralized trading systems. The potential mechanism is a rule quietly proposed in January that develop the definition of a “switch” to include “communication protocol systems”.

This could be the SEC’s big move on crypto. The industry realizes this.

  • “This is the most important and deepest regulation the SEC has ever had,” Nicholas said. Losurdo, a partner at the law firm Goodwin who previously worked at the SEC. “It has the ability to sweep a lot of DeFi and crypto, where now they don’t have jurisdiction.”
  • The comment period on this proposal is still open, but some crypto industry officials are concerned enough to have called on the SEC to to deploy themselves his comment period to 90 days so that more industry participants can provide feedback.
  • The proposal could “extend the SEC’s authority over spot digital asset markets and peer-to-peer decentralized networks in ways not mentioned or publicly discussed in the proposal,” Michelle Bond, CEO of the Association for Digital Asset Markets, which represents Galaxy, FTX, Paxos and others, wrote at the SEC.

DeFi players should take note. This change in definition could mean regulating not just centralized crypto entities, but even decentralized financial protocols, according to Losurdo.

  • To be clear, the 654-page proposal does not mention crypto or DeFi. But it does bring key changes, such as changing the definition of an “exchange function” to gathering people interacting, instead of just “ordering” as was the case before.
  • This broadening of the scope of what an exchange is could attract a range of crypto products, Losurdo said, since the SEC document says it applies to “trading in any type of security.” And Gensler has been clear that he believes many digital assets are actually securities.
  • Any person or group working on a DeFi protocol — which could mean a wide range of contributors, since the projects are generally open source — might need to register with the SEC, Losurdo said. Even someone who wasn’t part of a company but was writing software would potentially need to register, he said.

It’s unclear how it would work practically. The SEC has enough trouble prosecuting centralized crypto companies.

  • Many decentralized financial protocols are not owned by a company. They can be run by a DAO and run on automated software, so it’s unclear how the SEC would regulate these entities.
  • He could sue the companies that create these protocols. The SEC would have investigation Uniswap Labs, the company that created the decentralized crypto exchange Uniswap. But it’s unclear how such an action would change anything with the protocols themselves, which have a life of their own.
  • Many DeFi protocols are run overseas or have key people who are not US citizens or residents, so this is another challenge.

The SEC is already trying to bring the crypto world more under its purview. So far, it’s a mixed bag.

  • He went after crypto lending aggressively, recently settling with BlockFi for $100 million. But that involved a centralized lending operation. It’s unclear how the SEC would pursue truly decentralized lending or more complex operations like staking.
  • Gensler said he believes crypto exchanges need more protections for investors and should therefore be regulated by the SEC. But to do so, the SEC would have to demonstrate that the assets on the exchange are securities. And it may remain muddy until Congress acts.

It’s unclear what will happen with this particular rule change: Watch the SEC swamp of climate rules for how easily rule-making gets bogged down in lobbying and technicalities. But getting a rule adopted is one thing. Understanding how to apply it against DeFi will make this easy.

— Tomio Geron (E-mail | Twitter)


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on the money

On protocol: Recalcitrant European governments caved in by banning some – not all – Russian banks from SWIFT. The United States and its Western allies will also work to freeze the assets of Russia’s central bank, the White House, the European Commission and others said on Saturday.

Betterment has rolled out a student loan management product. The robot investment software company said the new tool allows users to monitor and make additional payments on their student loans.

Also on Protocol: Ukraine has changed its mind about accepting cryptocurrencies, announcing wallet addresses for taking bitcoin, ether and other tokens on its official government Twitter account. Previously, a non-governmental organization was the best way to channel crypto support.

A federal grand jury charged BitConnect founder Satish Kumbhani announced the DOJ on Friday. Kumbhani was accused of defrauding investors of $2.4 billion through a crypto loan product that officials said “operated like a Ponzi scheme.” The exchange closed in 2018 after receiving cease and desist orders from state regulators.

The European Parliament is delaying a vote on crypto regulation. A directive originally scheduled for a vote on Monday sparked criticism for language that could be considered a “de facto ban on bitcoin,” one official said.


Coinbase CEO Brian Armstrong is philosophical about the ups and downs of the market. “A few months ago I saw people lamenting, like, ‘I wish I had bought crypto sooner or COIN stocks sooner,’ and they didn’t think they would ever get the chance to. buy something again at these prices. Then, by a stroke of luck, when that opportunity arises, they feel pessimistic or something like that,” he said during the company’s earnings call last week.

SEC Commissioner Hester Peirce gave a in-depth interview at Barron’s which shed some light on some of the principles behind the pro-digital asset views that have led some to call it “Crypto Mom”. “You have to be careful not to regulate software code, because there are First Amendment considerations about trying to stop people from coding,” she said about DeFi regulation


Tuesday is a busy day for revenue, with SoFi (SOFI), Shift4 (FOUR) and Core technologies (EPAY). Look for SoFi’s update on its national banking charter and other signals on the state of e-commerce.

Also Tuesday: The of the Federal Reserve Data and Connectivity Symposium. Kavita Jaindeputy associate director who leads innovation policy at the Fed, is hosting the online event.

the Banking Automation Summit takes place Tuesday and Wednesday in Charlotte, North Carolina.

Payer (PAYO) publishes its results on Thursday, and Cipher mining (CIFR), an American bitcoin miner, publishes its results on Friday.

the Federal Reserve Bank of San Francisco hosts the Fintech: Innovation, Inclusion and Risks Conference Friday and Saturday. Figure co-founder June Or will deliver the keynote address.


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Thanks for reading – see you tomorrow!